asset protection

Asset Protection: case of the $54 million pair of pants

“After 2 years in court, I realized we could lose everything we had worked for…I felt heartbroken and overwhelmed.”

You’ve heard me talking about asset protection – how you should set up your estate to protect your spouse and children from threats to their inheritance from lawsuits, creditors, divorce, remarriage, etc. Maybe you’ve thought to yourself that your spouse or kids don’t need that because they are good drivers, make wise decisions, aren’t in a risky profession or business, would never marry a gold digger, etc. Well, that may protect them from some risks, but not all.

A man took his pants to a D.C. drycleaner. He came to pick them up and supposedly they misplaced them. So he sued the dry cleaner for damages of $54 million for the lost pants. How did he come up with $54 million? That’s $18,000 for each day that the store allegedly committed consumer fraud by having a sign on the wall saying “Satisfaction Guaranteed”.

The court found in favor of the dry cleaner. No surprise there. Then the customer appealed to get the ruling overturned. Guess what? The appellate court also agreed that the case was ridiculous and tossed it out. So everything is fine, right? Well, all that took over 2 years.

“Even though we were victorious, I knew no one had won this battle.”

The owners of the dry cleaner, Korean immigrants Soo and Jin Chung, had to sell the business, citing the legal expenses (well over $100,000) as well as the stress of becoming part of a case that was a media sensation.

What is the moral of this story (from an estate planning perspective)?

  • Threats include not just legitimate threats (such as a car accident that was your spouse’s fault), but also bogus threats that cost money to defend.
  • You can’t insure against all possible threats. $54 million is beyond any small business’ insurance policy.
  • Outside threats to assets are outside of our control. What are the odds a dry cleaner will lose a pair of pants? Probably 100% of dry cleaners have lost something at some point. What are the odds of getting sued for $54 million? Pretty slim, but all it takes is one loony customer who decides to take you to court. And all it takes is one nut job to threaten the hard earned money you leave to your wife or child.

Getting Old Ain’t for Sissies: 10 Things to Consider As You Get Older

Here are some things to consider for yourself as you look at getting older. They are in no particular order, just my random thoughts from years of working with families facing these situations.

1. Are you having discussions about how you want to be cared for as you get older? Talk about it. Better yet, put your wishes down in legal documents so people are clear what you want.

2. Is your family prepared to handle things without your help, whether financially or otherwise? If not, you better make doubly sure things are set up right, so they get the assistance they need.

3. Have you lined up the financial resources needed if you became disabled? Such as disability insurance (at work or individual), long term care insurance, emergency fund savings. Do you have too much debt? Do you really want to be retired or facing a disability with credit card debt or a mortgage that’s not paid off?

4. Who is going to help you with healthcare decisions? Who will encourage you to go to the doctor? Who will go to the appointments with you to make sure you stay as healthy as you can for as long as you can?

5. Are you spending too much? How does your income, savings, and spending line up if you look out a few years? Have you calculated how your savings will grow or shrink based on your current spending level? or do you need to have a professional help you do that?

6. Are you spending too little? You have worked hard and saved your money. It’s OK to spend some and enjoy yourself by traveling or other things you enjoy. Or, if you truly have more income than you need and can spend, consider using those funds to increase what you leave at death. For instance, if you have IRA distributions you have to take (after age 70.5), use those distributions to pay life insurance premiums. Then leave the life insurance to your loved ones or a charity you believe in. When we run statistical projections for clients considering life insurance, they almost always show that a person leaves more money at death by purchasing life insurance. If you really don’t need the money, parlay it into a bigger chunk with life insurance.

7. Never say never. Transitions and change are difficult. Are you laying down a gauntlet by saying “I never will…”? Instead, make a plan so you can enjoy the most freedom and as full a life as possible for as long as possible.

8. Are you willing to make a transition sooner than necessary so you can avoid losing control? By getting “greedy” and holding on too long, sometimes people can end up losing their independence more quickly. For example, a grandmother leaves the family home earlier than anyone thinks she needs to, and enters a retirement community, where she has less stress of home upkeep, and more social opportunity that keeps her young. Another grandmother waits too long, goes downhill at home by herself, gets hurt by falling, declines by not eating right. Then when she is later forced to move to another living arrangement, she can’t enjoy the people or activities there because of declining health. Remember, there are endless variations to the type of retirement community or assistance a person can choose. Make choices while you still have choices, instead of having those choices made for you in a crisis.

9. Make gifts while you are around to see someone enjoy them. Gifts to your church or charity. Gifts to family (especially of heirlooms where you can share the story behind them). If you can, give some money and things away while you are still healthy so you can see how they bring joy and benefit to those who received it. To learn more about charitable giving, click HERE.

10. The ultimate question. I personally can never think about getting older without thinking about the ultimate question – what is there beyond this life?  I believe that faith in Jesus Christ leads to eternal life.

Please, not another blog about Michael Jackson!

There are 2 kinds of people in the world. Some can’t get enough of the Michael Jackson saga. Others are complaining about how all the real news in the world is being drowned out by old Michael videos and talking heads analyzing his dysfunctional family. If you’re in the 2nd group, my apologies. But below is more great information about Michael and his estate planning.

Also, if you want another interesting take on Michael’s estate plan, check out the blog post of my colleague Victor Medina – “Michael Jackson’s Estate Plan – What He Did Right!”

MICHAEL JACKSON: Part Two

1. Don’t you want to avoid confusion? With Michael, there was a time period where it wasn’t clear whether he had a Will or not. In fact, his mom went to court and told the judge there was not a Will and asked that she be given power as the administrator. Now things change once the Will is presented to the court. Good planning will avoid this limbo period where people are wondering if there is a Will and where it is. Good planning will make sure that the right people know how to quickly get their hands on legal documents that you have prepared.

2. Who is a good choice as guardian of your kids? Michael’s mom is 79 years old. His youngest child is 7. If I have my math right, she will be 90 years old when he gets out of high school. Is she the best option as guardian? Under Illinois law, do you know who is qualified to raise your kids? Anyone over 18 who is not a felon but is U.S. citizen. So from that pool of people, the judge has to pick someone who is in the best interest of the child. In Illinois, the court will lean strongly toward following the parent’s wishes in naming a guardian, but is not absolutely required to name the guardian you list in your Will. If you properly name a guardian in writing, then your choice has “prima facie” validity. This means that the court presumes that your guardian choice is best, but the court may approve someone else if evidence shows that is better.

3. What about the other parent? The mother of 2 of Michael’s kids, Debbie Rowe, is to have nothing to do with them, according to his family at a press conference. She was not named as a guardian. I am assuming that she gave up all her parental rights because (in Illinois) the other surviving parent will continue to be the child’s guardian, regardless of what the Will said, unless their parental rights had already been terminated.

4. No planning = 18 year old with money. I assume that Michael’s trust provides for his children and gives instructions about how their money will be managed and when and how they can spend it or take control over it. But, if he had no plan or they couldn’t find the documents, then the law (at least in Illinois), is that kids get their money at age 18. Would your 18 year old high school senior be ready to receive your wealth (home, retirement plan, life insurance, etc.)?

5. Don’t be distracted by the big numbers. Don’t get caught in the trap that only rich people like Michael need to do estate planning. We should just call it “planning” and get rid of the term estate. Every person, regardless of their wealth or family situation, should do some kind of planning for when they are disabled or pass away. Good planning to make things easier, better, cheaper, smoother, quicker – for you now and your family later. Even doing nothing is a plan in itself.

6. End up like Elvis? Part 1. Michael was afraid he would end up dying young like Elvis. Hopefully Michael’s estate won’t end up like Elvis. When Elvis died, his estate was worth about $10 million, but by the time expenses, taxes, lawyers, and probate fees were all paid, there was less than $3 million left.

7. End up like Elvis? Part 2. Despite Elvis’ lack of planning for his death, his family has done very well with the family business. A few years ago, the family sold most of their Elvis rights for $100 million. From being worth $3 million to over $100 million in 30 years. Not bad. I say do both – set up good planning that handles your estate properly now, but also sets up your family for greater success later. Elvis’s family overcame bad initial planning to successfully grow the family wealth. Don’t make your family have to overcome that obstacle.

Wealth Transfer or Wealth Reception – Part #2 – The College Years

I went to U of I in Champaign-Urbana. Both undergrad and law school. A lot has changed since I left law school in 1995. Many new buildings, and tuition has gone way up. Do you know how much it will cost now for 4 years of undergrad, including tuition, books, room and board, etc.? Somewhere around $100,000.

Suppose your kid is ready to head to college this fall. He gets all his stuff packed, buys that little fridge, picks out a shower caddy thing, and is ready to head off to college. The day comes where you pack up the mini-van and head to Champaign. You help carry all the stuff into the dorm, give him a hug, tell him to behave himself. Then you pull out your checkbook and say “Well, since we know it’s going to cost you about $100,000 to get through the next 4 years, I thought I would go ahead and give it to you now.” So you write out that check, hand it over, get in the car and drive back home.

Assuming you had $100,000 sitting around that was earmarked for your child’s college, would you do it this way? Would you hand the entire amount over on the first day he moves in to the dorm? No? You wouldn’t do that? Why on earth not?

Well, I guess there could be a few “complications”.

1. He might not spend it wisely. You know, parties or a new car or who knows what? Then runs out of money before he gets the degree.

2. He might be taken advantage of. If word got out that he had a big wad of money just handed to him, do you think he would have any new “friends” that might be interested in hanging out? I’m sure there would be plenty of kids willing to help him make some financial decisions.

3. He might be less motivated to work hard. Hey, you’re only young once. Doesn’t it make sense to have some fun with a little of that money now? He figures he can always get a job during his last year or two of college to make up the difference.

4. What if he gets in trouble? Maybe gets in a car wreck and gets sued? Or gets in with the wrong crowd and makes a bad decision that leads to property damage or criminal charges?

5. He isn’t emotionally ready to handle that kind of money. You just handed him $100,000, even though he’s never had more than $500 in discretionary money to himself before now.

6. What if his plans change? Maybe he flunks out, changes his major, takes a semester off, or drops out of school to start a band? Are you expecting to get change back on your $100,000 if he doesn’t finish with a degree?

7. He might fall in love. Yes, love can do strange things to someone’s financial decisions.

WEALTH RECEPTION?

Well, I guess you realize that people die all the time leaving assets to their kids. And those kids may not be any more ready to receive it than your college student was to receive that $100,000 right now.

Let’s say something happens to you tomorrow and you left all your assets (house, retirement plans, life insurance, bank accounts, etc.) to your kids. Would the amount of money you leave them make an impact on their daily lives? How much impact? Very little, some, or a whole bunch? Would the lifestyle they could afford be changed?

Think of the specific amount of money you would leave if you died tomorrow. How much will it increase your child’s net worth? Double it, triple it, make it go up 10 times or a 100 times? or more?

All those issues that cause concern about the college student are the same issues we address with clients in estate planning. These issues are what I call “wealth reception” issues. It’s not just about how quickly we can get the check to the kids. More important is what impact, good or bad, will the money have on the kids after they get it. And will the wealth better their lives one year, 5 years, or 10 years after you’re gone?

Michael Jackson: King of Pop (and Estate Planning?)

Are you tired yet of hearing about the Michael Jackson saga? One thing for sure, the gossip media should have plenty to talk about for quite a while. It turns out Michael did have a Last Will & Testament after all. (Thanks to those who sent me links to good articles on his estate issues.) Despite the circus atmosphere, Michael’s estate situation gives us some reminders about important planning issues:

1. Wills are public. Usually, there are many issues that are much more important to your family than keeping your estate matters secret. But at the same time, do you really want people to see your private info? And with increasing online access to court records, it will be easier and easier for your neighbor or nosy relative to look at your Will in court records without leaving home.

2. Living Trusts are private. A living trust is a good way to keep your info private at your death. And that’s exactly what Michael did. Look at his Will. It is what we call a “pour over will”, meaning his will doesn’t have much in it except instructions to dump assets at his death into what they are calling his “Family Trust” (which is private and will stay private). So all the gory details about who gets what and when they get it are only in that private document, incorporated by reference into his Will. And it seems to me that Michael’s Will actually included more info than necessary. For instance, I usually would not put something in the Will about disinheriting anyone (as he did with is ex-wife). That kind of info can go in your trust to keep it all private.

3. Asset titling is key. We haven’t seen how this part plays out yet. Even though Michael had a living trust, if he didn’t properly title his assets in that trust before his death, then the probate court will have to do it using his will. Without assets organized properly, he will lose part of the benefits of the living trust.

4. Feeding frenzy? Michael’s death is a media frenzy, but also a money frenzy too. Friends, relatives, business associates, will all be scrambling to take financial advantage. Those who are controlling his assets will be approached by all kinds of people with all kinds of ideas and schemes, all designed to get some money from the estate. Marlon Brando’s estate attorney said people came “out of the woodwork making all sorts of claims” after Brando died. At your death, who will be in charge of your estate and who will be at risk for being taken advantage of?

5. Personal items are important. There is a court dispute over 2,000 personal items. Michael’s mom has control of them, but the real executors want them back. The judge told them to try to work it out. I have seen a lot of hurt feelings and disputes over personal items, sometimes of small dollar value. But sometimes the items of small dollar value have huge sentimental and emotional value. What have you done to make sure your personal items don’t cause a dispute later? What have you done to preserve the stories behind items of emotional value?

6. We never know when. We look at Michael and figure he was living a life on the edge that could lead to an early death. But the fact is that none of us know when our time is up. One thing about estate planning – you need to do it when you don’t need it, because when you need it, it’s too late to do it.

Despite some feeling like the topic has been covered way too well, there is even more we can learn from this situation, including how to choose guardians for your children. Check out Part II of this post here.

The Nursing Home – 5 Ways to Pay For It

How will you (or your parents or grandparents) pay for a nursing home? People work hard their whole lives saving money, living frugally, hoping to pass something on to their kids and grandkids. Then reality sets in as age and health issues force that money to be used for healthcare instead.

Maybe you have wondered, “What are the options for my family to pay for nursing and long term care costs?”

There are 5 basic ways to handle it.

1. Stay at home without outside help. As long as one spouse is healthy, this works fine. But too often I see the caregiver spouse start having health issues, possibly brought on by the stress of 24-hour care for their loved one.

2. Move in with family and avoid the expense altogether. Just tell them to get your room ready, you’re on your way! This option works great for some families, but not so great for others. And it’s not just the younger generation that has the concerns. Often, my older clients say they don’t want to be a burden to their kids or put stress on them. Plus, there are some health concerns that are just beyond what a family can handle at home on their own.

3. Spend your life savings, either on nursing help at home or in a facility.

4. Let the government pay for it. Too many times, I have heard people say, “I’ll give all my stuff to my kids and let the government pay for my nursing home.” Unfortunately, there are some kinks in this plan.

If you give your money away, you really have to give it AWAY. This means your kids can waste it all, the money can be exposed if your child gets divorced, or can be at risk if they have financial problems such as getting sued, having a downturn in business or getting laid off.

You can’t just give all your money away and then apply for Medicaid to get the government to pay for your nursing care. If you give assets away, it may impact your application if you apply within 5 years after the gift (5 years according to federal law – Illinois is still at 3 year “look back” because they are late in complying with the federal requirement).

Even if you get on Medicaid, you have limited options. The government won’t pay for home care and only pays for the bare minimum of care in a nursing home that may not have been your first choice. I’m sure it’s no surprise that the nicest nursing homes don’t take government aid, they only take private payments.

5. Buy long term care insurance. If you need long term care, whose money would you rather spend? The insurance company’s or yours (which was intended to be your kid’s inheritance)? Plus, certain long term care policies allow you to use the funds to hire help at home, so you can avoid a nursing home altogether. In addition, many people are exploring hybrid long term care benefits, where they purchase an annuity or life insurance policy that can be accessed for nursing costs if necessary.

We can help you sort out these options.  The earlier you start planning the better. If you would like to start planning now for nursing home costs, our popular Long-Term Care Essentials Workshop is a great place to start. This free workshop will talk about planning for care, protecting your assets and myths about Medicaid qualification. Find out more about the workshop HERE.

However, it’s never too late to plan.  Even if you have a loved one in a nursing home using their savings to pay for it, call us at (217) 726-9200. There are legal and financial strategies that may be able to protect some of the funds for the family.

For more information about general planning, check out our article “Getting Old Ain’t For Sissies: 10 Things to Consider As You Get Older” HERE.

Protecting Your Family Like an NFL Lineman: 4 Risks to an Inheritance

The other day I had a chance to speak at the Rotary Club. My topic, like the article “How (and Why) Athletes Go Broke” in the latest issue of Sports Illustrated, was about protecting the money you’ve worked so hard for. There are many ways your spouse, children or grandchildren could end up losing what was so important for you to leave behind. I know you can’t imagine your loved ones blowing your hard earned money (or maybe you can), but sometimes it happens in the blink of an eye. What are some of the risks to an inheritance?

There are generally 4 risks to an inheritance:

1. Lawsuits

The SI article is riddled with stories of lawsuits. Though it may not be something you think about, imagine your spouse, devastated by your recent death, running a red light and causing an accident involving a school bus. In an instant, all that you worked so hard for could be given away by the courts to the injured parties leaving nothing to care for your family in your absence.

2. Divorce

One NFL owner was once asked by one of his players what the most dangerous thing to happen to them financially could be. His answer: Divorce. Many players, who marry their hometown sweetheart, can never imagine a divorce in their future. Even if your son has married the sweetest girl in the world, there is no way to see what the future holds. Would you be OK giving half your hard earned money to her if they end up getting divorced a few years after you pass away? It happens regularly when people don’t plan ahead.

3. Remarriage

If you die, and your spouse remarries, do you mind if part of the money you left is split with the new spouse, or even later left to the new spouse’s kids? This could either be a gold-digger (or “bimbo” as some of my clients like to say) or a stand up, class-act new spouse. But either way, without planning, there is a risk those assets will end up where you did not intend. Your children could even lose access to the money they would need for college.

4. Wild Spending

Lots of quick money means a happy life, right? Well, that’s not what the stats show. Quick money (winning the lottery, getting an inheritance, or multi-million dollar NFL contract) can lead to wild spending, divorce and bankruptcy. If your children end up with large assets at the young age of 20, they could quickly blow it like any upstart professional athlete. If someone isn’t prepared to manage the money, the money will manage them. You’ve worked hard so your kids will be ok without you, but will they really be better off with a large sum of money that has no safeguards?

Nobody likes to think about these difficult issues, but with proper planning these assets can be protected and your loved ones will be protected – even if you can’t be around to do it. Give us a call at 217-726-9200 or make plans to attend an upcoming workshop on the basics of estate planning, so you can make sure your family is protected.